CalPERS blasts move by law firm

Thursday

May 23, 2013 at 12:01 AM

STOCKTON - A law firm representing a Stockton creditor in bankruptcy is accused of playing dirty by raiding attorneys from an opposing firm that represents the California Public Employees' Retirement System.

Scott Smith

STOCKTON - A law firm representing a Stockton creditor in bankruptcy is accused of playing dirty by raiding attorneys from an opposing firm that represents the California Public Employees' Retirement System.

CalPERS, with which the city contracts to manage employee pensions, wants the judge overseeing Stockton's bankruptcy to kick Winston & Strawn, LLP, off the case in an argument also with implications in San Bernardino's ongoing Chapter 9.

Winston & Strawn, a law firm of 1,000 attorneys around the world, represents National Public Finance Guarantee, which insures bonds Stockton stopped paying down in its financial crisis.

CalPERS contends in court papers that Winston & Strawn recruited three members of a restructuring and insolvency team - one partner and two associates - from the Charlotte, N.C., office of K&L Gates. CalPERS contracts with K&L Gates for assistance in the Stockton bankruptcy.

Those three attorneys were at the heart of a team forming CalPERS' strategy in Stockton's case, having collectively logged 500 hours at K&L Gates, CalPERS contends.

Yet, Winston & Strawn says the attorneys in question will be appropriately screened from the case. The firm is well aware of its legal and ethical obligations while hiring attorneys, Winston & Strawn said in a statement.

"We believe there is no basis to disqualify the firm," the statement said. "We will contest the motion vigorously and continue to represent National Public Finance Guarantee Corp."

CalPERS finds little comfort in the assurances because the capital market creditors in Stockton's bankruptcy have made it clear that their strategy is to impair the state agency.

"For Winston to suggest that it is not a serious or direct conflict of interest for lawyers to switch sides ... is to ignore the practical realities of this case," CalPERS argues in court papers, calling the three attorneys "tainted."

CalPERS, which is also central in San Bernardino's bankruptcy, adds that if one person in a law firm has confidential knowledge, the entire firm has the knowledge. Putting an ethical screen around the new attorneys is not realistic, CalPERS says.

Stockton filed bankruptcy June 28, 2012, and on April 1, U.S. Bankruptcy Judge Christopher Klein found the city eligible for Chapter 9 protection. CalPERS' role in the city's exit plan, or plan of adjustment, is expected to take center stage in a large fight that has yet to happen. The city expects to submit its plan of adjustment this fall.

Bankruptcy attorney Michael Sweet of Fox Rothschild, LLP, who is not actively involved in the Stockton or San Bernardino bankruptcies, said the attorneys switching firms do not necessarily create a conflict.

"People leave law firms all the time," he said. "There's a right way to do it and a wrong way to do it. CalPERS seems to think this was done in the wrong way."

John Sprankling, a law professor who teaches ethics at University of the Pacific's McGeorge School of Law in Sacramento, agreed.

Attorneys in the past decade have increasingly been on the move. It also might be more of an issue in a small law firm, compared to a global firm with offices in Beijing, Paris and San Francisco, he said.

"Screening properly implemented has proven to be an effective tool for protecting client confidentiality," Sprankling said.

Klein, who oversees Stockton's bankruptcy, is expected to take up the CalPERS motion July 2.